Stock Market Prediction: Down, Down, Down

The Dow closed at 12,231.11 yesterday, and we've just been through one of the best months for that index in quite some time.  Buoyed by news from Europe that they've taken action to help the new "Sick Man of Europe (Greece)", investors seem to be riding a wave of enthusiasm that will--I'm sorry to say, come crashing down on them in the next month.  Here's a prediction:  on December 15th, the Dow will be under 11,000.

Why so glum?  I'm not glum, I'm practical.  I've written about this before--when the Dow was at 14,000 in October of 2007, it was weighed up by the ridiculous fiction that was the balance sheets of financial stocks.  When it was at 6500 in March of 2009, it was weighed down by people who had lost sight of the basic value of many of the industrials.  I said in March 2009 that the Dow had been overvalued by 25% at its high, and so its natural place was somewhere around 10,500, a figure that reflected the basic value of "the rest" of the market.

Here we are, two and a half years later.  Nothing has really changed in the basic fundamentals of the economy.  Unemployment is up a bit (from 8.6% in Mar 09 to 9.1% now).  No fundamental changes have occurred in 1) how we as a nation are addressing debt 2) how we as a nation are addressing financial regulation and reform and 3) how we as a nation are addressing revenue.  We are in the midst of a mini-bubble, caused by 1) a misplaced sense that the political agreements made in the Spring and Summer on the budget and the debt ceiling have had salutary impacts on the economy and 2) Europe's news.  It is all about to end.

In the next few weeks, nothing will dominate the headlines like the activities of the Congressional Super-committee.  Meeting largely behind closed doors (which I am ok with--see, Philadelphia, 1787), the Super-committee is meeting in order to come to agreement on how to deal with trillions of dollars in debt.  The "gun" to their head (and the rest of ours, presumably) is that if they DON'T come to some agreement, Defense gets cut by $650B and other discretionary spending gets cut by $650B.  If you thought our political system looked amateurish trying to deal with the debt ceiling, you ain't seen nothin' yet.

The prospect of a Presidential Election a year away provides both sides with incentives not to do a damn thing.  Positions are hardening on both sides, and the "gun" held to the head of the Congress was PUT THERE by Congress--it can be dropped at any time.  So we are left with the following scenario:  the Supercommittee is supposed to report out its "bill" to the Congress in three weeks.  They will not do so, as they will not have reached agreement on anything.  If they do, the bill will not be able to pass both chambers.  And so, the Congress will have to "extend" the mandate of the committee, or it will have to "drop the gun", both of which will ensure for the investing world a picture of continuing dysfunction in the American political system.  What's next?  Well, another credit downgrade, for one thing.  Any of the ratings agencies which have not yet dropped the US rating will HAVE to in order to continue to be taken seriously.  The dollar--the world's favorite reserve currency--will come under additional pressure, as what has been its bulwarks for 70 years--America's economy and its stable political system--will both be besieged.

Is the end near?  No, not really.  It's just that the present situation is not reality.  If you've got some profits to take--take 'em.  Because things will look differently in six weeks.